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How gas price controls sparked ‘70s shortages
But the eradication of price controls came with a hitch: Congress enacted a new system of “windfall profits taxes” on oil companies in 1980 in an effort to ensure they did not profit egregiously from their newfound freedom to charge market prices.
The tax on the “windfall” revenues earned by U.S. oil companies when market prices were substantially higher than their cost of extracting oil turned out to be another bomb, said Jerry Taylor, analyst with the Cato Institute.
Increased production around the world drove down the price of oil and caused the tax to generate less revenue than expected. By the time it expired in 1988, the tax had generated $40 billion in revenue instead of the $175 billion estimated by the Treasury. After oil prices collapsed in 1986, the tax produced no revenue at all.
Because the tax was applied to U.S. oil producers but not international companies, the Congressional Research Service concluded that it had cut domestic production by 3 percent to 6 percent and increased oil imports by 8 percent to 16 percent.
The tax was “counterproductive,” said Mr. Taylor. It “discouraged investment in the oil business.”
Mr. Sowell said profits are the least-understood aspect of business, and have been under attack since the days of Karl Marx and George Bernard Shaw, who called profits arbitrary “overcharges” motivated by greed.
In reality, profits provide the vital incentive businesses need to make products consumers want at low prices, he said.
Most businesses that succeed do so because they find a way to mass-produce items that the public wants at low prices, he said, noting the examples of Henry Ford’s automobile empire and Wal-Mart’s international chain of discount stores.
In the past century, Mr. Sowell noted, socialist economies were viewed as virtuous because they operated without profits, yet they were never as good as capitalism at generating goods and services people wanted because of the bureaucratic inefficiencies of state-run economies.
Pete Geddes, executive vice president of the Foundation for Research on Economics and the Environment, noted that discredited proposals such as price controls and windfall profits taxes seem to come up every time gas prices get uncomfortably high.
“What is it about rising gasoline prices that causes IQs and body temperatures to converge?” he asked, calling the windfall profits tax “a transparently absurd act of political pandering.”
By Tom Fitton
New photos confirm the attack's coordination and its cover-up
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Let it snow